Greener Cars, Cheaper Fuel: Ethanol Prices Drop

- October 28, 2013 2:34 PM
Categories: Commentary, Commodities | Tags: , ,

Spend Matters welcomes another guest post from Monika Sosnowska of Mintec. 

Greener motorists should have a smile on their faces, as the price of ethanol has recently dropped to a three-year low, mainly helped down by the drop in cost of corn. Over 90% of US ethanol is made from corn, and with gasoline containing on average 10% ethanol, this should have a positive effect on the cost of a tank of gas.

ethanol

The US is the world’s largest producer of ethanol, accounting for a 61% share of global production. Ethanol is widely used as a biofuel, where it is mixed with gasoline to produce a range of different fuel blends. Most standard motor engines work well with up to about 10% ethanol (known as E10) mixed into the gasoline, and 95% of US gasoline is blended with ethanol to some extent. Flexible fuel vehicles can accept as much as 85% ethanol in the blend (E85) but the number of flexible fuel cars in the US remains low as only a small number of gas stations sell E85. Ethanol also contains less energy than gasoline, and so ethanol gasoline blends have a lower mileage per gallon as a result.

However, government regulations are supportive of an ethanol industry expansion. The regulations are designed to reduce greenhouse gas emissions by expanding the use of renewable fuels, as well as reduce US dependence on imported petroleum. The volumes of renewable sources to be used as a fuel for transport purposes are set to increase every year.

Ethanol prices have fallen steadily since June, mirroring the drop seen in the price of corn. Although ethanol can also be produced from other crops, like sugarcane or wheat, more than 90% of US ethanol is made out of corn and so the cost of corn has a great impact on ethanol. In fact, 42% of the total corn produced in the US is now used for the ethanol production, up from 14% a decade ago, and practically all of the increase in corn production over the past 10 years has been used for ethanol.

As we discussed a few weeks ago, corn prices increased significantly last year due to the drought. Ethanol producers’ margins were squeezed and ethanol prices rose in response. This led to a drop in demand and ethanol fuel stocks rose by 10% in the second half of 2012. Since then, corn prices have been dropping and they have fallen substantially since the spring due to forecasts of a record US crop. Production of ethanol increased by 15.9% during the first half of 2013, but stocks fell by nearly 14.3%, indicating a recovery in ethanol demand as prices dropped.

Corn prices are expected to stay at these low levels until the end of this year, and this should keep the price of ethanol down, which in turn should hopefully keep a few extra dollars in our pockets as we fill up.

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